Let’s clear the air: Adjustable rate mortgages are not bad. Yes, they’ve gotten a “bad rap” over the last year because people tend to associate adjustable rate mortgages with recent housing woes plaguing the nation but the loans are not the cause of the nation’s real estate crisis; misunderstanding and misusing them is. The reality is that adjustable rate mortgages can, in fact, be an excellent mortgage loan option IF you fully understand how they work. So, with that said, it’s time to learn.
Who is eligible for an adjustable rate loan? As with any mortgage loan, anyone can apply. However, adjustable rate loans do tend to be more appealing to those who deal with budgeting changes well and those who don’t plan on living in a specific house for more than three to five years. Why? Keep reading…
What exactly is an adjustable rate? An ARM is one of the two most popular mortgage loan types offered in the United States. As the name suggests, the mortgage loans are called adjustable because the rate of the mortgage loan changes periodically-most commonly every six months. Mortgage loan firms often abbreviate “adjustable rate mortgage” with “ARM.”
How do ARM’s work? The process for obtaining an ARM is the same as any other loan type. You must apply for a mortgage loan and then, based on your credit standing, a mortgage loan officer will process your information to determine which lenders are willing to fund your mortgage. In most cases, loan officers will present you with multiple home loan options-ARM and fixed-rate mortgages.
Why do people choose the adjustable rate loan type? The simple answer: The numbers associated with ARMS always look great! In fact, they’re nearly too good to be true…but they are true. The interest rates are low and the monthly mortgage payments are manageable for a much larger percentage of the population than fixed rate loans.
When is an ARM a good idea? Typically, ARMs are best for homebuyers who plan on living in a home for just a few years. The reason: Most ARMs are for 5-years or less; after that time, the ARM typically converts to a higher interest fixed-rate mortgage loan. ARMs can also be a good alternative for real estate investors who cannot obtain an interest only loan for an investment property.
Though anyone can apply for an adjustable rate mortgage loan, whether it’s the best type of loan is completely dependent upon the homebuyer. That’s because the continuous changing of the mortgage interest rates and subsequently, the mortgage payments can be a financial stress for some homebuyers. The ARM becomes even more of a stressor once the ARM matures and the mortgage loan interest rate spikes.
So, what’s the alternative to an adjustable rate mortgage? A fixed rate mortgage of course.
Like ARMs, the name says it all for fixed rate mortgages. Fixed rate mortgages maintain the same interest rate through the life of the loan and therefore, the same mortgage payments. However, there is a tradeoff for that predictability: higher interest rates. That’s why those who plan to stay in a particular home for three or more years often prefer fixed rate mortgage loans.
In the end, the key to determining which type of loan is best-fixed or adjustable-is about mathematics and lifestyle. If you’re on a limited budget but expect your income to increase substantially in each of the upcoming years, an adjustable rate mortgage may be the best option for getting you into a home sooner rather than later. However, if you’re uncertain about if or how your income will fluctuate, it’s best to play it safe and opt for a fixed rate loan. That way, your mortgage payment won’t be a surprise, regardless of what the economy is doing. Of course, if you base your home mortgage loan choice on a mortgage payment that you can afford comfortably based on your current financial situation versus trying to “figure out how to make things work,” either type of loan will have you in your dream home in no time.